If equity release is to hit £5bn by 2020, three factors – supply, demand and access to advice – must play a crucial role
The equity release market is caught in a curious conundrum: it is a market that is booming – with year-on-year, double-digit growth – and yet simultaneously it represents just a fraction of the overall lending market and the tiniest sliver of the potential retirement lending market.
The prediction last year by the Association of Mortgage Intermediaries – that the sector could hit £5bn by 2020 – is therefore both ambitious and conservative. If the equity release market were Schrödinger’s cat, it would be both impressively big and disappointingly small at the same time.
Nonetheless, a £5bn market by 2020 would be a significant milestone. From a starting point of around £1.6bn in 2015, it would take annualised growth of more than 20 per cent to reach that figure. By any market standard, that would be very healthy growth.
Growth in this sector will largely be determined by three factors: supply, demand and access to advice.
On the supply side, there was a hint of potential disaster when pension freedoms were introduced in April 2015 and the sales of annuities plummeted. Annuity providers have long been the backbone of the equity release market, providing the funding required to originate loans. With falling sales, there was a question mark as to whether these companies would be willing, or able, to sustain the same levels of funding, never mind provide more.
Yet the market has found a way to not only sustain but grow the level of new business. Annuity sales have started to bounce back and new funders and lenders have been entering the market.
The new funders entering this market now and in the coming years – all attracted by the long-term, stable and healthy rates of return this market can offer – will bring huge sums of money to invest, sums that could dwarf the size of the current market and then some. Supply of funds, it would seem, will not be this market’s issue. So what of demand?
Customer demand for equity release continues to grow. There are numerous drivers for this, not least that equity release meets a critical and growing societal need for more retirement funds to see people through ever-increasing longevity. There is also a growing need for remortgage options for those at or in retirement who still have substantial interest-only debt.
Today’s over-65s in the UK control more than £1tn of housing wealth, much of it owned outright (albeit some will carry sizeable mortgage debt into retirement, as mentioned above). Given that the average retiree leaves full-time work in their 60s or 70s with barely £30,000–£40,000 saved in a money purchase pension scheme, having access to double or even triple that amount by unlocking the equity in their homes can have a life-changing impact on the quality of their retirement.
Equity release customers are getting younger (the under-70s are the fastest-growing cohort, according to the leading advice specialist) and are using equity release for more diverse reasons. Whereas once it was mostly a debt-repayment vehicle, today it is just as likely to be used for gifting or helping children through university or on to the first rung of the housing ladder.
Perhaps the biggest threat to the growth of this market is the availability of advice. The sector is still dominated by a few specialist firms so a tripling of market size will require many more advisers to meet consumer demand.
I think £5bn by 2020 is a conservative view of where the market could and indeed should be. Of course, as well as the issues above there will be a dependency on the prevailing economic conditions. But this market is primed for a significant period of growth in the coming years. It is just a question of whether, with the benefit of 2020 hindsight, £5bn would seem impressively large or disappointingly small.
Stuart Wilson is channel marketing director at More 2 Life